Plan Sponsors Cherry-Picking From Target-Date Series

Rather than offer the complete lineup of a target-date series in their 401(k) plan, sponsors are selecting only those funds that fit the age and demographics of their employees. This could result in under-funded target-date funds that could put the entire lineup in jeopardy, according to a new report, “Trends in Date-Date Portfolios on Recordkeeper Platforms,” from Financial Research Corp.

And most asset managers are not anticipating these demand hurdles, FRC said.

The report is based on the analysis of target-date funds in 50,000 401(k) plans, representing 90% of all 401(k) plan assets. It looks at distribution trends among target-date funds and offers ways to grow these types of funds.

“Target-date funds have experienced explosive growth in recent years and continue to be a notable bright spot for the mutual fund industry,” said Mike Alfred, CEO of BrightScope, which assisted FRC on the research. “Asset managers that wish to move the needle in this space must have a holistic view into the marketplace dynamics so they can capitalize on the significant opportunities.”

In one plan, for instance, the plan sponsor selected only one of the 12 target-date funds available. “When this trend plays out in the broader marketplace, it leads to varying asset levels across target-date categories,” said Lynette DeWitt, author of the report. “As seen in FRC data, 70% of target-date mutual fund assets are help in the five most popular fund categories: 2015, 2020, 2025 and 2030. We anticipate that the less popular funds in a series will remain open to maturity now, but target-date series in the future will be comprised of fewer funds.”